Prices on the market are constantly moving. Sometimes slower, the other times faster. And they also form peaks and troughs. Traders want to catch these moments, so they can profit from the positions they opened at the right time. But sometimes it can be a difficult task to predict a future movement. That is why there are technical indicators to be of assistance. Disparity Index is one of them.
The Disparity Index is a momentum indicator that will indicate is it a strong or weak trend and thus, how possible the reversal is. What it measures is the relative position of the last closing price of an asset to the chosen moving average. A result is given in percentage.
Generally, when the result is below zero, that is when the percentage lies on a negative scale, you can expect a growing sales pressure and the asset‘s price to fall. A zero value is saying that the price of the asset is equal to its moving average. And a positive percentage, that is when the values are above zero, show the price's momentum is increasing upward.
How to set up the Disparity Index indicator on the chart
Go to your IQ Option account and open a trading platform. Choose the asset and the type of chart. Next, click on the chart analysis icon which you will find on the left side. A new window will pop up. Choose the “Indicators” tab and then “Trend”. The Disparity Index will be among them. After clicking on it, the indicator will be added to your chart.
The Disparity Index is in the form of a line that oscillates around zero value. A formula for calculations is:
Disparity Index = (Current Market Price − n-PMAV) / n-PMAV × 100
Where n-PMAV means n-Period moving average value.
Using the Disparity Index in trading
Significant signals occur when the Disparity index crosses the zero line. This is no different to, for example, the ROC (the Rate of Change) which is also a momentum indicator. When the oscillator is crossing the value of 0, the change in the trend is predicted. And when the indicator reaches extreme values, the price correction is imminent.
When the asset‘s price is pushed in a particular direction, not many will take the opposite side. The trend will soon reverse. The Disparity Index is going to the extreme indicating that the asset falls into the oversold or overbought areas. And this gives the information that a change is imminent and thus, a trader should not follow the trend anymore. Remember that the values above zero inform about the upward momentum. And when the line falls far below zero, there is a pressure on selling during the downward trend.
You can also catch a divergence with the Disparity Index. The rules are similar to other oscillators. Look at the price and the line of the indicator. If they are not moving in the same direction, that is, one is rising while another is falling, you have noticed a divergence.
It is a good idea to use another tool along with the Disparity Index. It will serve as a confirmation of your assumptions. Remember, there is a demo account on IQ Option platform so you can make risk-free transactions and implement the indicators that you have just learned about. Practice using them on a demo account and with time, you will be ready to move to the real one.
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